Helping our SMEs with Their Tax Burden
Sir, this Bill is a reprise of the theme of making our corporate tax environment more competitive in the aftermath of the BEPS 2.0 rollout, which was debated last month in Parliament. I spoke on the joint debate on the Multinational Enterprise (MNE) (Minimum Tax) Bill[1] and Income Tax (Amendment) Bill[2] then, as did my Sengkang teammate Louis Chua,[3] but I will offer some additional thoughts here. In particular, I will speak about the nature of incentives for companies, and, more generally, about the principle of effective taxes for businesses.
Keeping effective tax rates low isn’t necessarily a problem if they yield benefits
The overarching economic objective of incentives offered via tax breaks is to encourage firms to expand their investments and scale up their operations. In Singapore, this is targeted at high value-added products or services, and the pathway begins with, initially, schemes such as the Pioneer Certificate Incentive[4] or Start-up Tax Exemptions,[5] which offer a tax holiday of three to five years. When this expires, it may be followed by the Development and Expansion Incentive (DEI), which grants a concessionary tax rate of between 5 and 15 percent for earnings that exceed the average for the prior 3 years.
Schemes such as these have allowed Singapore to keep its effective tax rates (ETRs)—that is, the rates companies actually pay, rather than what, on their face, they owe—far below our statutory tax rates for decades. Hence, rather than the 17 percent rate that should have been in place since 2010, businesses paid, on average, less than a third of that: 5.1 percent that year, and an even lower 4.3 percent in 2019.[6]
This need not be a bad thing, pe se; economists know that low taxes on capital promotes investment—from both domestic and foreign sources—which in turn drives growth. But it is worth reflecting a little on why we accept this tradeoff. After all, we do not willy-nilly grant tax relief to income on labor or land, believing that workers and landowners—rich and poor—should pay their fair share for public goods that we all enjoy.
Hence, at the least, we must be convinced that such tax relief generates benefits—of additional investment that would lead to new jobs, or create new competitive industries here, or yield greater opportunities for other companies—that exceed the costs of the forgone tax revenue, which could have been directed toward myriad other uses.
Whether these tax breaks do so, however, is far from established. To be fair, the government does require that a certain number of jobs be created as qualifying conditions for these schemes. But what is not known is whether these jobs would have been created anyway, even in the absence of the tax incentives. Nor do we know if there has been any gaming of this criterion, with temporary or “ghost” positions created to meet the conditions, only to be extinguished thereafter. I would be curious to know if MTI or MOF have ever conducted rigorous studies that show how our low ETRs are causally linked to job creation or spillover effects, and if so, if they would be willing to share them with this House and the public.
Finer points of the Bill worth some additional scrutiny
Sir, regardless of what one thinks about the efficacy of keeping effective taxes low, the reality is that the global rollout of BEPS 2.0 threatens to upend this comfortable arrangement for corporates here. New legislation being passed around the world—such as our own MNE Minimum Tax Bill just passed in this House—will now allow top-up taxes to be levied by other jurisdictions, should they view our effective tax rates as unjustifiably low.
Now, the stipulations of BEPS only apply to the largest MNEs. This offers some leeway for us to marginally improve the corporate tax environment for the corporations that aren’t among the largest. This is where the present Bill can play a crucial role. Still, in my view, some aspects merit deeper questioning.
First, the amendments to Section 22 propose to limit the favorable tax treatment to five years, through till the end of 2028. This sort of built-in deadlines to tax holidays—often referred to as “sunset clauses”[7]—are now standard fare in public policy surrounding corporate tax incentives. Indeed, even Special Economic Zones—the traditional preserve of tax freedom worldwide—have now begun to routinely incorporate sunset provisions.[8]
However, it is crucial that sunset clauses not be prolonged indefinitely, because doing so could give rise to opportunities for politicking and quid pro quo rent-seeking, as firms lobby for extensions of special treatment.[9] I will note that Bill, in Clause 2(j), seems to suggest that DEIs have been in place since 2012. It would be useful for this House to understand if there might yet again be an extension of the DEI for qualifying firms, or if the government will commit to adhering to the 2028 date as the genuine sunset.
Second, the proposed amendments to Section 41 include, under the definition of “fixed capital expenditure” in part 4(a)(ii), the “acquisition of know-how or patent rights.” While I understand the motivation behind why one might wish to include such expenses as part of fixed capital, the immediate concern is that this could be used as a loophole to creatively transfer existing, intangible assets from one corporate entity to another, as a means of reducing taxable income. This sort of potential abuse in transfer pricing was, after all, one of the motivating drivers of the BEPS project to begin with.[10] It would be ironic if our laws inadvertently provided yet another reason for countries to accuse us of seeking a role as a tax haven, albeit on a smaller scale than the MNEs covered by BEPS.
Third, I observed that there is a distinctive treatment of the conditions associated with accessing concessionary tax rates when it comes to manufacturing versus services. For example, to qualify for the tax rate of 5 percent in the former, a firm must expend an additional $13 million in fixed asset investment, and employ an additional 30 skilled employees, by the fifth year.[11] In contrast, while the equivalent qualifying expenditures for the latter are the same in the fifth year, it adds further requirements, that $8 million be invested and 18 skilled employees be hired by the third year.[12] It would be helpful to understand the justification behind this disparate treatment of the two sectors.[13]
Maintaining lower taxes on SMEs relative to MNCs are necessary to help them grow and thrive
Mr Speaker, the end result of this Bill will be, I believe, a better lock on the balance of taxation between the ETRs paid by our largest companies, relative to our smaller ones.
To be clear, the Minister for Finance had, in response to Parliamentary Questions filed by my honorable friend Louis Chua, previously stated that the ETR for SMEs over the past decade runs between 4 and 5 percent, while that for larger corporations amounted to between 10 and 11 percent.[14]
While one may take issue with the precise way that this calculation is made, my sense is that the combination of BEPS-related stipulations embedded in last month’s Bills, alongside the Bill we are debating today, will go some way toward redressing any residual bias in favor of granting large corporations excessively generous tax relief.
This is welcome because, as I shared last month, we really should be weaning ourselves off a growth model that is reliant on foreign capital and MNEs, and moving toward one that is conducive to entrepreneurship, and supporting the development of home-grown SMEs as much as possible.
After all, MNEs benefit disproportionately more than SMEs from the public goods provided by the taxpayer—our favorable business environment, safe domestic market for skilled labor, and stable political climate—and have the necessary resources to contribute back toward sustaining the system that they have benefitted so much from. We need not fear making these companies pay their fair share, given how their location decisions are driven primarily by the availability of skilled workers, open economic borders, high-quality transport infrastructure, and a sound institutional environment, and only secondarily by low taxes on corporate income.[15]
By the same token, we need to help our small firms, who are struggling under the burden of high and rising costs, especially as rising rental costs of land snuff out affordable factory facilities and office spaces. And when the high costs of living are eventually transmitted into durable increases in real wages, these firms will also need to manage their ongoing costs of running their businesses amidst a small, cost-conscious domestic consumer market. Tax relief will give them a genuine shot at growing and, perhaps, flourishing in the long run. That is an outcome that I am certain all of us in this House would look forward to seeing, and for these reasons, I support the Bill.
[1] Multinational Enterprise (Minimum Tax) Bill 33/2024.
[2] Income Tax (Amendment) Bill 32/2024.
[3] Hansard (2024) 95(142): Oct 14.
[4] Subject to the fulfillment of conditions, such as incurring additional fixed asset investments of at least $44 billion by year 5, and the employment of an additional 30 skilled workers, based in Singapore, by year 5. See EDB (2024), Pioneer Industries (Manufacturing), Singapore: Economic Development Board.
[5] Prior to 2019, there was complete exemption for the first $100,000 of chargeable income, followed by 50% exemption on the next $200,000. This has since been revised to 75% for the first $100,000 and 50% for the next $1000,000. See IRAS (2024), Tax Exemption Schemes for New Start-Up Companies, Singapore: Inland Revenue Authority of Singapore.
[6] Hansard (2021) 95(39): Oct 4.
[7] Viswanathan, M. (2007), “Sunset Provisions in the Tax Code: A Critical Evaluation and Prescriptions for the Future,” NYU Law Review 82(2): 656–88.
[8] Geocaniga, R.T. (2010), “No Longer Special: An Analysis of the Withdrawal of Tax Incentives in Special Economic Zones and Its Legal Implications,” Ateneo Law Journal 55: 409–46; Farole, T. & G. Akinci (eds.) (2011), Special Economic Zones: Progress, Emerging Challenges, and Future Directions, Washington, DC: The World Bank.
[9] Kysar, R.M. (2006), “The Sun Also Rises: The Political Economy of Sunset Provisions in the Tax Code,” Georgia Law Review 40(2): 335–405.
[10] OECD (2014), “Guidance on Transfer Pricing Aspects of Intangibles,” OECD/G20 Base Erosion and Profit Shifting Project Report, Paris: Organisation for Economic Cooperation and Development.
[11] EDB (2024), Development and Expansion Incentive for Manufacturing, Singapore: Economic Development Board.
[12] EDB (2024), Development and Expansion Incentive for Services, Singapore: Economic Development Board;
[13] This could be due a belief there longer gestation times are required before investments in manufacturing can be effected, versus services. If so, it is unclear where the evidence to support this claim derives from.
[14] SMEs are defined as those with turnover less than $100 million. See Hansard (2021) 95(39): Oct 4.
[15] Islam, M.S. & A. Beloucif (2024), “Determinants of Foreign Direct Investment: A Systematic Review of the Empirical Studies,” Foreign Trade Review 59(2): 309–37.